Projections for cotton market based on rainfall, export levels

Published: Sunday, April 23, 2000

WAYNE BOARDA-J Farm Editor

The level of exports, timely rainfall and the USDA's acreage report in June those factors will drive the cotton market for the next several months, says a Texas Agricultural Extension Service economist.

But, Carl Anderson points out, with carryover from last year's crop, around a plentiful 4 million bales, the size of the new crop relative to an estimated usage of 18 million bales will play a key role in the market for the last half of 2000.

The potential for supply to far exceed usage stems from the 700,000-acre increase in intended acreage from the 14.9 million last year, he said.

As an example, a low yield of 600 pounds per harvested acre on only 90 percent of 15.6 million planted acres produces a short crop of 17.55 million bales. A high 700-pound yield on 95 percent of acreage planted, however, produces a large crop of 21.6 million bales.

The market rally during the first three months of the year stemmed from fewer foreign supplies, increased consumption, recovery in the Asian economies and higher synthetic fiber prices. Carryover of cotton in China has declined about 5 million bales from 16.2 million in the last season, he said, adding that Chinese farmers are expected to plant less cotton this season.

The ''A'' Index has increased substantially this year. In early April, it was only eight cents per pound below the 66-cent level where the loan deficiency payment (LDP) disappears.

Anderson thinks that foreign production this season may fall some 12 million bales short of foreign use, which is a significant increase from a production-to-consumption deficit of 9 million in 99/00 and a 4 million bale deficit in both the 1997 and 1998 crops. The tightening of foreign supplies indicates a strong market for U.S. exports and a higher ''A'' Index, he said.

Exports from the 00/01 U.S. crop could reach the 8 to 9 million bale range, he said.

In 1994, U.S. cotton exports totaled 9.4 million bales following several years of large foreign production-consumption deficits. Because export markets greatly depend on foreign domestic and trade policies and growing conditions, however, export shipments involve tremendous uncertainty.

He said he feels that the April USDA supply-demand report included some bearish world supply numbers because of a sudden major upward revision in those Chinese cotton stocks. A 6 million bale increase in foreign consumption from last season was supportive, if not bullish, to the market, though.

''The market responded by driving December 2000 futures below 60 cents for about two days,'' Anderson said. ''But, December quickly recovered to 61 cents on April 13. Also, the daily price range has widened, indicating a vicious struggle between the bearish and bullish market forces.''

Carryover stocks in China were revised up by 2.7 million bales to a burdensome 16.2 million. The result, he said, was an increase in foreign and world stocks by the same amount.

Too, the prospects of a 19 million bale or larger U.S. crop, and a carryover of 5 million bales, makes a big hurdle for any market rally to last beyond 65 cents for December 2000, Anderson said.

A low yield and a large amount of planted acreage lost to adverse weather could push December futures above 65 cents, he said, but a large crop around 20 million bales might drive futures prices below 50 cents per pound.

''Based on production in recent years, a five to 10 percent loss in planted acreage before harvest and a 100-pound per acre yield variation are real possibilities,'' Anderson said. ''The prevailing market uncertainty clearly indicates that producers need a marketing plan to reduce the likelihood of receiving a price on the lower end of a likely 49 to 69-cent variation in the December 2000 price range.''

He said he feels producers need to establish a price floor because favorable weather and yields could produce a 19-20 million bale crop. A large crop would likely send prices lower toward the loan rate.

Buying puts alone or in conjunction with selling out-of-the-money calls, forward contracts or joining a marketing association are common pricing strategies to manage the risk of much lower prices in the second half of this year, Anderson said, adding that the seasonal price, except in short crop years, usually peaks in the spring.